State revenue offices to penalise micro businesses

Michael Harrison

Imagine you have decided to establish your own small business. This means you must provide your own tools of trade, cover your own operating expenses and battle to win customers or clients. In exchange you get to work when, where and how you choose - sometimes every waking hour and often, especially in the early days, at the kitchen table.

As you are working for yourself, you are responsible for earning enough money to live on and therefore you are loath to take leave of any kind because when you don’t work you don’t get paid. In the beginning you are probably a one-man-band, operating as a sole trader. This makes you the very smallest of small businesses.

Of course, being in small business also means you must comply with all the laws that apply to your industry. If you want to run your own financial advice business, this means the Corporations Law Act.

The act currently imposes a particular business structure on financial advisers – they must act as authorised representatives (ARs) of an Australian Financial Services Licence (AFSL) holder or licensee. The licensee is a bigger business, which authorises people to provide advice to consumers.

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Advisers can work as employees of the licensee and enjoy all the benefits associated with that, however they also can, and often do, choose to set up their own small businesses.

Under the Corporations Law Act, when an adviser sets up a small business, the licensee must, by law, receive and process payments made by or on behalf of the adviser’s clients and pass these payments on to the adviser. In exchange for a fee or service charge paid by advisers operating their own small businesses, the licensee must also, by law, provide and monitor education, conduct compliance audits, manage complaints and disputes and arrange professional indemnity insurance. But because these advisers run their own businesses, they are not employees and the licensee therefore does not have to provide any of the benefits traditionally associated with being an employee – for example, a salary, superannuation guarantee contributions and annual, sick or long service leave.

Despite the fact these advisers are operating their own businesses and are not enjoying any of the benefits of being an employee, the Victorian State Revenue Office (SRO) in particular, but also its counterparts in other states, is arguing that advisers operating one-man-band enterprises are employees.

Why? We believe it is to leave the way clear for them to impose payroll tax on licensees – a cost which would ultimately be borne by the sole practitioner adviser who, apart from paying every other cost associated with running the business, has also already paid goods and services tax (GST). Advice businesses that employ two or more employees are exempt from payroll tax, so this really is a penalty imposed on only the very smallest of small advice businesses.

Sole practitioner advice businesses based in NSW were made exempt from payroll tax in 2005, however lost the exemption following interstate payroll tax harmonisation announced in the 2007-08 NSW State Budget on the grounds that it would have ‘little practical effect’.

Protecting the interests of small advice businesses would be a matter of amending the Corporations Law Act to allow financial advisers to receive payments directly from or on behalf of clients, instead of having these payments held and passed on by licensees.

We have partnered with law firm, Lander & Rogers, to pick up the baton on behalf of sole practitioner advisers. Landers & Rogers believe the Corporations Law Act could be amended without disturbing the consumer protection measures provided by the act.

We have raised the matter with the Victorian SRO and the Victorian State Treasurer. We have raised the matter with the NSW SRO and the NSW State Treasurer. We have raised the matter with SROs and State Treasurers across the country and we have been ignored.

We have also raised the matter with Senator Mathias Cormann and to date have not received a response.

We believe the SROs of Australia are attempting to over-tax the very smallest of small advice businesses. In the interests of fair play, they simply must be stopped.